SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number: 001-14875
FTI CONSULTING, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1261113
-------- -----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2021 Research Drive, Annapolis, Maryland 21401
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(Address of Principal Executive Offices) (Zip Code)
(410) 224-8770
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at November 6, 2001
- ------------------------ ---------------------------------
Common Stock, par value 12,899,703
$.01 per share
FTI CONSULTING, INC.
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INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 2000 and
September 30, 2001 3
Consolidated Statements of Income - Three months ended
September 30, 2000 and three months ended
September 30, 2001 5
Consolidated Statements of Income - Nine months ended
September 30, 2000, nine months ended September 30, 2001,
and Pro Forma Consolidated Statement of Income
- Nine months ended September 30, 2000 6
Consolidated Statements of Cash Flows - Nine months
ended September 30, 2000 and nine months ended
September 30, 2001 7
Notes to Unaudited Consolidated Financial Statements
- September 30, 2001 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
Part I. Financial Information
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars, except per share and share amounts)
December 31, September 30,
2000 2001
------------------------------------------
(audited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,235 $ 2,820
Accounts receivable, less allowance of $1,321 in 2000 and $1,688
in 2001 20,380 24,590
Unbilled receivables, less allowance of $797 in 2000 and $898 in
2001 11,952 14,140
Income taxes recoverable 1,317 2,838
Deferred income taxes 1,029 1,029
Prepaid expenses and other current assets 1,924 2,794
-----------------------------------------
Total current assets 39,837 48,211
Property and equipment:
Furniture, equipment and software 20,977 21,031
Leasehold improvements 4,560 3,891
-----------------------------------------
25,537 24,922
Accumulated depreciation and amortization (12,382) (13,075)
-----------------------------------------
13,155 11,847
Goodwill, net of accumulated amortization of $8,196 in 2000 and
$11,958 in 2001 91,971 90,968
Other assets 1,168 797
-----------------------------------------
Total assets $146,131 $151,823
=========================================
See accompanying notes.
3
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars, except per share and share amounts)
December 31, September 30,
2000 2001
---------------------------------------
(audited) (unaudited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 4,325 $ 5,702
Accrued compensation expense 10,339 11,633
Deferred income taxes 500 500
Current portion of long-term debt 4,333 4,333
Other current liabilities 177 363
-----------------------------------------
Total current liabilities 19,674 22,531
Long-term debt, less current portion 56,167 29,417
Other long-term liabilities 600 1,662
Deferred income taxes 1,066 1,066
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000 shares authorized in
2000 and 5,000,000 shares authorized in 2001, none outstanding - -
Common stock, $.01 par value; 16,000,000 shares authorized in
2000 and 45,000,000 shares authorized in 2001; shares issued and
outstanding of 10,567,447 in 2000 and 12,816,298 in 2001 106 128
Additional paid-in capital 53,951 71,871
Retained earnings 14,567 26,200
Accumulated other comprehensive income (loss) - (1,052)
-----------------------------------------
Total stockholders' equity 68,624 97,147
-----------------------------------------
Total liabilities and stockholders' equity $146,131 $151,823
=========================================
See accompanying notes.
4
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands of dollars, except per share data)
Three Months ended September 30,
2000 2001
-----------------------------------
(unaudited) (unaudited)
Revenues $33,395 $40,555
Direct cost of revenues 17,132 20,814
Selling, general and administrative expenses 9,265 11,479
Amortization of goodwill 1,233 1,255
------- -------
27,630 33,548
------- -------
Income from operations 5,765 7,007
Other income (expense):
Interest income 83 33
Interest expense (3,226) (1,004)
------- -------
(3,143) (971)
------- -------
Income before income taxes 2,622 6,036
Income taxes 1,154 2,414
------- -------
Net income $ 1,468 $ 3,622
======= =======
Earnings per common share, basic $ 0.22 $ 0.29
======= =======
Earnings per common share, diluted $ 0.19 $ 0.27
======= =======
See accompanying notes.
5
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands of dollars, except per share data)
Nine months ended September 30,
2000 2000 2001
Actual Pro Forma/(1)/ Actual
----------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Revenues $98,993 $101,432 $124,184
Direct cost of revenues 49,942 50,892 64,295
Selling, general and administrative expenses 27,476 27,583 32,720
Amortization of goodwill 3,482 3,699 3,762
---------------- ----------------------- -----------------------
80,900 82,174 100,777
---------------- ----------------------- -----------------------
Income from operations 18,093 19,258 23,407
Other income (expense):
Interest income 175 175 127
Interest expense (8,812) (9,392) (3,686)
---------------- ----------------------- -----------------------
(8,637) (9,217) (3,559)
---------------- ----------------------- -----------------------
Income before income taxes and extraordinary item 9,456 10,041 19,848
Income taxes 4,161 4,418 8,215
---------------- ----------------------- -----------------------
Income before extraordinary item 5,295 5,623 11,633
Extraordinary loss on early extinguishment of debt,
net of income taxes of $660 869 869 -
---------------- ----------------------- -----------------------
Net income $ 4,426 $ 4,754 $ 11,633
================ ======================= =======================
Income before extraordinary item per common share, basic $ 0.84 $ 0.87 $ 1.01
================ ======================= =======================
Earnings per common share, basic $ 0.71 $ 0.74 $ 1.01
================ ======================= =======================
Income before extraordinary item per common share, diluted $ 0.73 $ 0.76 $ 0.91
================ ======================= =======================
Earnings per common share, diluted $ 0.61 $ 0.64 $ 0.91
================ ======================= =======================
(1) Pro forma assumes the acquisition of P&M occurred on January 1, 2000.
See Note 6.
See accompanying notes.
6
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands of dollars)
Nine months ended September 30,
2000 2001
-------------------------------------------
(unaudited)
Operating activities
Net income $ 4,426 $ 11,633
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on early extinguishment
of debt, before income taxes 1,529 -
Amortization of goodwill 3,482 3,762
Depreciation and other amortization 2,012 2,767
Provision for doubtful accounts (91) 468
Non-cash interest expense 1,818 184
Other (41) 182
Changes in operating assets and liabilities:
Accounts receivable, billed and unbilled (5,462) (6,866)
Prepaid expenses and other current assets 227 (870)
Accounts payable and accrued expenses (1,443) 1,377
Accrued compensation expense 3,008 1,294
Income taxes recoverable/payable (711) (1,521)
Other current liabilities 2,000 131
------------ -----------
Net cash provided by operating activities 10,754 12,541
Investing activities
Purchase of property and equipment (4,257) (2,485)
Proceeds from sale of property and equipment 47 910
Contingent payments to former owners of subsidiaries (185) (2,244)
Acquisition of P&M, including acquisition costs (49,404) (516)
Change in other assets (19) 202
------------ -----------
Net cash used in investing activities (53,818) (4,133)
Financing activities
Issuance of common stock 1,082 17,942
Payments of long-term debt (40,820) (26,750)
Repurchase of detachable stock warrants (277) -
Payment of financing fees (3,950) (17)
Borrowings under long-term debt arrangements 89,233 -
Changes in other long-term liabilities (283) 2
------------ -----------
Net cash provided by (used) in financing activities 44,985 (8,823)
------------ -----------
Net increase (decrease) in cash and cash equivalents 1,921 (415)
Cash and cash equivalents at beginning of period 5,046 3,235
------------ -----------
Cash and cash equivalents at end of period $ 6,967 $ 2,820
============ ===========
See accompanying notes.
7
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001
(amounts in tables expressed in thousands, except per share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2000.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month and three month periods ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001.
The pro forma information included in the Consolidated Statements of Income for
the nine months ended September 30, 2000 is presented to give effect to the
January 31, 2000 acquisition of Policano & Manzo, L.L.C. and related financing,
assuming the transactions occurred on January 1, 2000 (see Note 6). The pro
forma information is not necessarily indicative of the operating results that
would have been achieved had the transactions actually occurred on January 1,
2000, nor is it necessarily indicative of future operations.
2. Recent Accounting Pronouncements
As of January 1, 2001, the Company adopted Financial Accounting Standards Board
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Statement requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value is immediately recognized in earnings.
Upon adoption of the Statement on January 1, 2001, the Company maintained
interest rate swap agreements in the notional amounts of $32.5 million related
to outstanding term loans. The interest rate swaps effectively fix the rate of
interest on a portion of the Company's floating rate term loans, and are settled
as the related term notes mature. The adoption of Statement 133 on January 1,
2001 resulted in the cumulative effect of an accounting change of $348,000
charged to other comprehensive loss.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and other intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in income before taxes of approximately $5 million. During 2002, the Company
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. Currently, management
has not yet determined the effect of these tests; however, the impact is not
expected to be material to the Company's earnings or financial position.
8
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001 (continued)
(amounts in tables expressed in thousands, except per share data)
3. Stockholders' Equity
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
-----------------------------------------------------------------------------
Balance at January 1, 2001 $106 $53,951 $14,567 $ - $68,624
Issuance of 116,553 shares of common stock
under Employee Stock Purchase Plan 1 1,014 1,015
Exercise of options to purchase 1,441,920 shares
of common stock 14 16,913 16,927
Exercise of warrants to purchase 898,055 shares
of common stock 9 3,449 3,458
Retirement of 207,677 shares of common stock
in connection with warrant exercise (2) (3,456) (3,458)
Comprehensive Income:
Cumulative effect on prior years of changing to a
different method of accounting for interest rate
swaps (Note 2) (348) (348)
Other comprehensive loss - change in fair value of
interest rate swaps (704) (704)
Net income for the nine months
ended September 30, 2001 11,633 11,633
--------
Total comprehensive income 10,581
----------------------------------------------------------------------------
Balance at September 30, 2001 $128 $71,871 $26,200 $(1,052) $97,147
============================================================================
Total comprehensive income for the three months ended September 30, 2001 was
$2,860 representing the change in fair value of interest rate swaps of
($414,000) and net income of $3,622.
4. Income Taxes
The income tax provisions for interim periods in 2001 and 2000 are based on the
estimated effective tax rates applicable for the full years. The Company's
income tax provision of $8.2 million for the nine-month period ended September
30, 2001 consists of federal and state income taxes. The effective income tax
rate in 2001 is expected to be approximately 41%. This rate is higher than the
statutory federal income tax rate of 35% due principally to state and local
taxes and the effects of non-deductible goodwill recorded in connection with
certain acquisitions.
9
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001 (continued)
(amounts in tables expressed in thousands, except per share data)
5. Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per share:
Three months ended
September 30,
2000 2001
-----------------------------------
Numerator used in basic and diluted earnings
per common share:
Net income $1,468 $ 3,622
============ ===========
Denominator:
Denominator for basic earnings per common share
-- weighted average shares 6,536 12,506
Effect of dilutive securities:
Warrants 633 18
Employee stock options 567 1,036
------------ -----------
1,200 1,054
------------ -----------
Denominator for diluted earnings per common
share -- weighted average shares and effect of
dilutive securities 7,736 13,560
============ ===========
Earnings per common share, basic $ 0.22 $ 0.29
============ ===========
Earnings per common share, diluted $ 0.19 $ 0.27
============ ===========
10
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001 (continued)
(amounts in tables expressed in thousands, except per share data)
5. Earnings Per Share (continued)
Pro Forma
------------------------
Nine months Actual
------------------------------------
ended Nine months ended
September 30, September 30,
2000 2000 2001
---------------------- ------------------------------------
Numerator used in basic and diluted earnings
per common share:
Income before extraordinary item $5,623 $5,295 $11,633
Extraordinary item, net of taxes (869) ( 869) -
---------------------- ------------- ------------------
Net income $4,754 $4,426 $11,633
====================== ============= ==================
Denominator:
Denominator for basic earnings per common share
-- weighted average shares 6,448 6,272 11,545
Effect of dilutive securities:
Warrants 570 526 284
Employee stock options 420 404 990
---------------------- ------------- ------------------
990 930 1,274
---------------------- ------------- ------------------
Denominator for diluted earnings per common
share -- weighted average shares and effect of
dilutive securities 7,438 7,202 12,819
====================== ============= ==================
Income before extraordinary item per common
share, basic $ 0.87 $ 0.84 $ 1.01
Extraordinary loss per common share, basic (0.13) (0.13) -
---------------------- ------------- ------------------
Earnings per common share, basic $ 0.74 $ 0.71 $ 1.01
====================== ============= ==================
Income before extraordinary item per common
share, diluted $ 0.76 $ 0.73 $ 0.91
Extraordinary loss per common share, diluted (0.12) (0.12) -
---------------------- ------------- ------------------
Earnings per common share, diluted $ 0.64 $ 0.61 $ 0.91
====================== ============= ==================
11
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001 (continued)
(amounts in tables expressed in thousands, except per share data)
6. Acquisition of Policano & Manzo, L.L.C.
Effective on January 31, 2000, the Company acquired the membership interests of
Policano & Manzo, L.L.C. ("P&M"). P&M, based in Saddlebrook, New Jersey, is a
leader in providing bankruptcy and turnaround consulting services to large
corporations, money center banks and secured lenders throughout the U.S. The
initial purchase price totaled approximately $54.9 million, consisting of $48.3
million in cash, 815,000 shares of common stock valued at $5.5 million and
acquisition related expenses of $1.1 million. In January 2001, the Company
recorded additional purchase price of $516,000 upon the resolution of certain
contingencies in the purchase agreement. The acquisition was accounted for
using the purchase method of accounting and approximately $52.7 million of
goodwill was recorded and is being amortized over its estimated useful life of
20 years. The results of operations of P&M are included in the accompanying
consolidated statements of income commencing January 31, 2000 and in the
accompanying unaudited pro forma consolidated statement of income as if the
acquisition was made on January 1, 2000. The pro forma consolidated results of
operations are not necessarily indicative of the results that would have
occurred had these transactions been consummated as of the beginning of 2000 or
of future operations of the Company.
7. Segment Reporting
The Company is a multi-disciplined consulting firm with leading practices in the
areas of financial restructuring, litigation consulting and engineering and
scientific investigation, through three distinct operating segments. The
Financial Consulting division offers a range of financial consulting services,
such as forensic accounting, bankruptcy and restructuring analysis, expert
testimony, damage assessment, cost benefit analysis and business valuations.
The Litigation Consulting division provides advice and services in connection
with all phases of the litigation process. The Applied Sciences division offers
engineering and scientific consulting services, accident reconstruction, fire
investigation, equipment procurement and expert testimony regarding intellectual
property rights.
The Company evaluates performance and allocates resources based on operating
income before depreciation and amortization, corporate general and
administrative expenses and income taxes. The Company does not allocate assets
to its reportable segments as assets generally are not specifically attributable
to any particular segment. Accordingly, asset information by reportable segment
is not presented. The accounting policies used by the reportable segments are
the same as those used by the Company. There are no significant intercompany
sales or transfers.
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately by division presidents who are
most familiar with the segment operations.
12
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001 (continued)
(amounts in tables expressed in thousands, except per share data)
7. Segment Reporting (continued)
The following table sets forth historical information on the Company's
reportable segments:
Three months ended September 30, 2000
-------------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- ---------------------------------------------------------------------------------------------------------
Revenues $17,063 $9,786 $6,546 $33,395
Operating expenses 10,385 7,838 5,517 23,740
------- ------ ------ -------
Segment profit $ 6,678 $1,948 $1,029 $ 9,655
======= ====== ====== =======
Three months ended September 30, 2001
-------------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- ---------------------------------------------------------------------------------------------------------
Revenues $23,578 $11,358 $5,619 $40,555
Operating expenses 14,586 8,870 5,277 28,733
------- ------- ------ -------
Segment profit $ 8,992 $ 2,488 $ 342 $11,822
======= ======= ====== =======
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
Three months ended September 30,
- -----------------------------------------------------------------------------------
2000 2001
- -----------------------------------------------------------------------------------
Operating Profit:
Total segment profit $ 9,655 $11,822
Corporate general and administrative
expenses (1,925) (2,648)
Depreciation and amortization (1,965) (2,167)
Interest expense, net (3,143) (971)
------- -------
Income before income taxes $ 2,622 $ 6,036
======= =======
13
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001 (continued)
(amounts in tables expressed in thousands, except per share data)
7. Segment Reporting (continued)
Pro forma nine months ended September 30, 2000
-------------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- ---------------------------------------------------------------------------------------------------------
Revenues $48,352 $29,454 $23,626 $101,432
Operating expenses 28,303 23,901 18,224 70,428
------- ------- ------- --------
Segment profit $20,049 $ 5,553 $ 5,402 $ 31,004
======= ======= ======= ========
The following table sets forth historical information on the Company's
reportable segments:
Actual nine months ended September 30, 2000
------------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- --------------------------------------------------------------------------------------------------------
Revenues $45,913 $29,454 $23,626 $98,993
Operating expenses 27,250 23,901 18,224 69,375
------- ------- ------- -------
Segment profit $18,663 $ 5,553 $ 5,402 $29,618
======= ======= ======= =======
Nine months ended September 30, 2001
-------------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- ---------------------------------------------------------------------------------------------------------
Revenues $71,664 $32,358 $20,162 $124,184
Operating expenses 43,464 26,272 17,360 87,096
------- ------- ------- --------
Segment profit $28,200 $ 6,086 $ 2,802 $ 37,088
======= ======= ======= ========
A reconciliation of segment profit for all segments to income before income
taxes and extraordinary item is as follows:
Nine Months ended September 30,
Pro forma Actual Actual
2000 2000 2001
- --------------------------------------------------------------------------------------------------------
Operating Profit:
Total segment profit $31,004 $29,618 $37,088
Corporate general and administrative
expenses (6,031) (6,031) (7,152)
Depreciation and amortization (5,715) (5,494) (6,529)
Interest expense, net (9,217) (8,637) (3,559)
------- ------- -------
Income before income taxes and
extraordinary item $10,041 $ 9,456 $19,848
======= ======= =======
Substantially all of the revenue and assets of the Company's reportable segments
are attributed to or located in the United States. Additionally, the Company
does not have a single customer that represents ten percent or more of its
consolidated revenues.
14
FTI Consulting, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
FTI Consulting, Inc. (the "Company" or "FTI") is a multi-disciplined consulting
firm with leading practices in the areas of financial restructuring, litigation
support and engineering and scientific investigation. Our Financial Consulting
division, which accounted for 58% of our revenues for the nine months ended
September 30, 2001 and was our most profitable division, offers a broad range of
financial consulting services, such as forensic accounting, bankruptcy and
restructuring analysis, expert testimony, damage assessment, cost benefit
analysis and business valuations. Our Litigation Consulting division, which
accounted for 16% of our revenues for the nine months ended September 30, 2001,
provides advice and services in connection with all phases of the litigation
process. Our Applied Sciences division, which accounted for 26% of our revenues
for the nine months ended September 30, 2001, offers forensic engineering and
scientific investigation services, accident reconstruction, fire investigation
and expert testimony regarding intellectual property rights.
Revenues generated by our business divisions consist primarily of fees for our
professional services. We charge our professionals' time at hourly rates, which
vary from professional to professional, based on the professional's position,
experience and expertise. We also directly bill our clients for services
provided by our independent consultants. We recognize revenues for the
production of our work product, including static graph boards, color copies and
digital video production and fees for use of our equipment and facilities. We
also pass through our out-of-pocket expenses, such as our cost of recruiting
subjects and participants for research surveys and mock trial activities and our
travel. We recognize revenues in the period when the service is provided.
Retainers received from clients are excluded from revenue and offset against
accounts receivable.
Our direct cost of revenues consists primarily of employee compensation and
related payroll benefits, the cost of outside consultants assigned to revenue-
generating activities and other related expenses billable to clients.
Selling, general and administrative expenses consist primarily of salaries and
benefits paid to office and corporate staff, as well as rent, marketing and
corporate overhead expenses. For the nine months ended September 30, 2001,
selling, general and administrative expenses accounted for about 26.3% of
revenues. Our corporate costs, which are included in selling, general and
administrative expenses, represented about 5.8% of revenues for the nine months
ended September 30, 2001.
We are organized into three distinct operating segments that contribute to the
overall performance of our company. As such, we evaluate segment performance and
allocate resources based on the operating income before depreciation and
amortization, corporate general and administrative expenses and income taxes for
each division. In the first nine months of 2001, our Financial Consulting
division accounted for 76.0% of our total segment profit, while our Litigation
Consulting division accounted for 7.6% and our Applied Sciences division
accounted for 16.4%.
On September 30, 2001, we had about $91.0 million of unamortized goodwill, which
we are amortizing over 20 to 25 year periods. Annual goodwill amortization is
approximately $5.0 million. (See "Future Assessment of Recoverability and
Impairment of Goodwill" and "Effect of Recent Accounting Pronouncements" below.)
Approximately $14.0 million of our unamortized goodwill is not deductible for
tax purposes. Consequently, our effective tax rate for 2001 is anticipated to be
40.5% before amortization of goodwill and 41.4% after amortization of goodwill.
Acquisition
On February 4, 2000, we acquired Policano & Manzo, L.L.C. ("P&M") as further
described in Note 6 of "Notes to Consolidated Financial Statements." P&M,
based in Saddle Brook, New Jersey, specializes in providing financial
restructuring, advisory and forensic accounting services to the workout and
bankruptcy community. These services are provided on a nationwide basis to
financially distressed businesses, creditors, investors and other interested
parties. The initial purchase price totaled $54.9 million, consisting
15
of $48.3 million in cash, 815,000 shares of our common stock valued at $5.5
million and acquisition-related expenses of $1.1 million.
Results of Operations
Three Months Ended September 30, 2001 and September 30, 2000
Revenues. Total revenues for the three months ended September 30, 2001 increased
21.6% to $40.6 million from $33.4 million for the three months ended September
30, 2000. Our Financial Consulting division's revenues grew by 38.0% to $23.6
million from $17.1 million, primarily as a result of the Company's ability to
recruit seasoned financial professionals to meet the continued strong demand for
our financial consulting services. Our Litigation Consulting division's revenues
decreased 13.8% to $5.6 million in the third quarter of 2001 from $6.5 million
in the third quarter of 2000, continuing the decline that began in the third
quarter of 2000 primarily as a result of an unusual number of trials that were
deferred or cancelled due to settlement or settlement discussions. Management
continues to monitor this business segment closely and has taken significant
steps to contain costs, including reorganizing responsibilities along national
lines for our two principal practice areas, trial consulting and trial
technologies. Our goals are to improve our overall utilization of employees,
further standardize practices, install new incentive systems for our sales and
marketing efforts, establish new profit incentive programs for these practice
areas, and to continue to reduce costs by flattening our organizational
structure. Our Applied Sciences division showed 16.3% revenue growth in the
third quarter of 2001, to $11.4 million, from $9.8 million in the third quarter
of 2000, as it continues to enjoy a very strong market for its services.
Direct Cost of Revenues. Direct cost of revenues was 51.3% of our total revenues
in the third quarters of 2001 and 2000.
Selling, General and Administrative Expenses. These expenses were 28.3% of
total revenues in the third quarter of 2001 and 27.7% in 2000. The change in
2001 was primarily attributable to increased occupancy costs in our Financial
Consulting Division, and increased corporate expenses.
Amortization of Goodwill. Amortization of goodwill in the third quarters of
2001 and 2000 remained approximately the same. We discuss goodwill amortization
further in "Future Assessment of Recoverability and Impairment of Goodwill"
below.
Other Income and Expenses. Interest expense consisted primarily of interest on
debt we incurred to purchase businesses over the past several years. Interest
expense decreased substantially in the third quarter of 2001 compared to 2000
through the reduction in debt and interest rates. We used the proceeds of an
equity offering in October 2000 to repay $30.0 million of debt; refinanced our
remaining debt in late 2000 to achieve lower interest rates; used cash generated
from operations and proceeds from the exercise of options and warrants to pay
down debt; and market interest rates on our revolving credit facility have
declined.
Income Taxes. Our effective tax rate decreased to 40.0% in the third quarter of
2001 from 44.0% in 2000, principally from the reduced effect of non-deductible
goodwill amortization as income increases. Approximately $14.0 million of our
unamortized goodwill is not deductible for tax purposes. Consequently, our
effective tax rate for 2001 is anticipated to be 40.5% before amortization of
goodwill and 41.4% after amortization of goodwill.
Nine Months Ended September 30, 2001 and September 30, 2000
Revenues. Total revenues for the nine months ended September 30, 2001 increased
25.5% to $124.2 million from $99.0 million for the nine months ended September
30, 2000, or 22.5% based on pro forma revenues of $101.4 million for the first
nine months of 2000 including the P&M acquisition. Our Financial Consulting
division's revenues grew by 56.2% to $71.7 million from $45.9 million, or 48.1%
on a pro forma basis from $48.4 million including the P&M acquisition. Our
Litigation Consulting division's revenues decreased 14.4% to $20.2 million in
the first nine months of 2001 from $23.6 million in the first nine months of
2000. Our Applied Sciences division experienced 9.8% revenue growth in the first
nine months of 2001 to $32.4 million from $29.5 million in the first nine months
of 2000.
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Direct Cost of Revenues. Direct cost of revenues was 51.8% of our total revenues
in the first nine months of 2001 and 50.4% in the first nine months of 2000, or
50.1% based on pro forma revenues and direct costs for the first nine months of
2000 including the P&M acquisition. The reduction in gross margin in 2001
resulted primarily from decreased productivity in the Litigation Consulting
division.
Selling, General and Administrative Expenses. These expenses were 26.3% of
total revenues in the first nine months of 2001, 27.8% in 2000 and 27.2% on a
pro forma basis in 2000. The decrease in 2001 was primarily attributable to the
growth of the Financial Consulting division, which has a lower ratio of selling,
general and administrative expenses to revenues than the Litigation Consulting
and Applied Sciences divisions, net of increases in Financial Consulting
division occupancy costs and corporate expenses.
Amortization of Goodwill. Amortization of goodwill in the first nine months of
2001 and 2000 on a pro forma basis remained approximately the same. We discuss
goodwill amortization further in "Future Assessment of Recoverability and
Impairment of Goodwill" below.
Other Income and Expenses. Interest expense consisted primarily of interest on
debt we incurred to purchase businesses over the past several years. Interest
expense decreased substantially in the first nine months of 2001 compared to
2000 through the reduction in debt and interest rates. We used the proceeds of
an equity offering in October 2000 to repay $30.0 million of debt; refinanced
our remaining debt in late 2000 to achieve lower interest rates; used cash
generated from operations and proceeds from the exercise of options and warrants
to pay down debt; and market interest rates on our revolving credit facility
have declined.
Income Taxes. Our effective tax rate decreased to 41.4% in the first nine months
of 2001 from pro forma 44.0% in 2000, principally from the reduced effect of
non-deductible goodwill amortization. Approximately $14.0 million of our
unamortized goodwill is not deductible for tax purposes. Consequently, our
effective tax rate for 2001 is anticipated to be 40.5% before amortization of
goodwill and 41.4% after amortization of goodwill.
Extraordinary Item, net of Taxes. As a result of the write-off of unamortized
debt discount and deferred financing costs associated with the debt that we
refinanced on February 4, 2000, we had an $869,000 loss on early extinguishment
of debt, net of taxes, in the first nine months of 2000.
Future Assessment of Recoverability and Impairment of Goodwill
In connection with our various acquisitions, we recorded goodwill, which we are
amortizing on a straight-line basis over periods of 20 to 25 years. These are
the periods during which we estimate we will benefit from this goodwill. At
September 30, 2001, unamortized goodwill was $91.0 million, or 59.9% of our
total assets and 93.7% of our stockholders' equity. Goodwill arises when an
acquirer pays more for a business than the fair value of the tangible and
separately measurable intangible net assets. For financial reporting purposes,
goodwill and all other intangible assets are amortized over the estimated period
benefited. We have determined the period for amortizing goodwill based upon
several factors, the most significant of which are the relative size, historical
financial viability, growth trends of the acquired companies and the relative
lengths of time these companies have been in existence.
Our management periodically reviews the carrying value and recoverability of our
unamortized goodwill. If the facts and circumstances suggest that the goodwill
may be impaired, we would adjust the carrying value of the goodwill. This would
result in an immediate charge against income during the period of the adjustment
and/or a shortening of the length of the remaining amortization period, which
would result in an increase in the amount of goodwill amortization during the
period of adjustment and each period thereafter until fully amortized. If we
adjust goodwill, we cannot assure you that we will not have to make further
adjustments for impairment and recoverability in future periods. The most
significant of the factors we will consider in determining whether goodwill is
impaired will be losses from operations; loss of customers; and industry
developments such as our inability to maintain market share, the development of
competitive products or services or imposition of additional regulatory
requirements. (See "Effect of Recent Accounting Pronouncements" below.)
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Liquidity and Capital Resources
In the first nine months of 2001, we generated $12.5 million of cash flow from
our operations, compared to cash generated from operations of $10.8 million in
the first nine months of 2000. We attribute this increase in cash flow primarily
to a $7.2 million increase in net income in 2001 reduced by increases in working
capital requirements. We experienced a temporary reduction in the customary
level of our collections during the period immediately following September 11,
2001, which resulted in higher than normal receivable balances at September 30,
2001. Collections in the early part of October 2001 were accelerated.
During the first nine months of 2001, we spent $2.5 million for additions to
property and equipment. At September 30, 2001, we continued the expansion or
renovation of five of our major offices scheduled to begin during the fourth
quarter of 2001. We expect to spend approximately $3 million on these five
offices in the fourth quarter of 2001 and the first half of 2002. We also paid
$2.2 million to former owners of businesses we acquired in previous years to
satisfy contingent consideration obligations.
During the nine months ended September 30, 2001, options to purchase 1,441,920
shares of common stock were exercised, generating $17.9 million in new capital
including related tax benefits. In addition, we sold 116,553 shares of common
stock to our employees participating in the Employee Stock Purchase Plan,
generating $1.0 million of cash. We used these net proceeds and cash flow from
operations to pay-down $26.8 million of debt during the first nine months of
2001.
In the fourth quarter of 2000, we completed a public offering of 4.025 million
shares of common stock. We used the net proceeds and our other financial
resources to repay the $30.0 million senior subordinated notes that we issued on
February 4, 2000. In December 2000, we refinanced our $61.0 million term loan
and the $7.5 million revolving credit facility. Our new credit facility
consists of an amortizing term loan of $32.5 million, of which $29.4 million was
outstanding at September 30, 2001, and a $47.5 million revolving credit line, of
which $4.3 million was outstanding at September 30, 2001. The new credit
facility bears interest at LIBOR plus 2.25%, which declines if our leverage
ratio improves. The interest rate declined to LIBOR plus 2.00% at the beginning
of August 2001 based on our leverage ratio as of June 30, 2001 and will decline
to 1.75% at the beginning of November 2001 based on our leverage ratio at
September 30, 2001. We obtained interest rate protection, through interest rate
swaps, on the $32.5 million term loan.
The new credit facility is secured by all of our assets. Under this facility, we
are required to comply with various specified financial covenants related to our
operating performance at the end of each quarter, and the payment of dividends
is restricted. We believe we will be in compliance with all loan covenants
throughout 2001. The Company expects that available cash and credit facilities
will be sufficient to meet its normal operating requirements in the near term.
Effect of Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board approved the issuance of
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 on business combinations changes
current practice by requiring the use of the purchase method for all business
combinations initiated after June 30, 2001, thereby eliminating the use of the
pooling-of-interests method of accounting. Additionally, Statement No. 141
provides new criteria for determining whether acquired intangible assets should
be recognized separately from goodwill and continues to ensure that the
presentation of pro forma information required under Accounting Principle Board
No. 16, Business Combinations, is included in the financial statements.
Statement No. 142, Goodwill and Other Intangible Assets, eliminates the
requirement to amortize goodwill over finite lives. Rather, the asset must be
tested for impairment at least annually at the reporting unit level using an
approach defined by the Statement. Upon adoption of Statement No. 142, goodwill
amortization will cease. Any impairment loss recognized as a result of a
transitional impairment test of goodwill is recognized as the effect of a change
in accounting principle in the period of adoption. Statement No. 142 will be
effective for the Company beginning January 1, 2002.
Upon adopting Statement No. 142, management believes that a transitional
impairment charge will not be required. Amortization of goodwill, expected to
total approximately $5 million in 2001 will cease in 2002.
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Forward-Looking Statements
Some of the statements under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and elsewhere in this Quarterly Report
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements not to be fully achieved. These
forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements
are only predictions. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this Quarterly Report to conform such statements to actual results and do not
intend to do so. Factors which may cause the actual results of operations in
future periods to differ materially from intended or expected results include,
but are not limited to (1) the loss of any key employees because the Company's
business involves the delivery of professional services and is labor-intensive;
(2) the availability and terms of additional capital or debt financing to fund
future acquisitions and for working capital purposes; (3) significant
competition for business opportunities and acquisition candidates; (4)
technological changes affecting our Litigation Consulting division; (5) the
risks of professional liability; (6) any factor that diminishes our professional
reputation; (7) fluctuations of revenue and operating income between quarters or
termination of client engagements; (8) the successful management of the growth
of our business; (9) the integration of future acquisitions; and (10) risks
associated with quantitative and qualitative market risks such as fluctuations
in interest rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2001, the Company had $33.7 million in long-term debt. As
discussed in Note 2 to the Consolidated Financial Statements (unaudited) at
September 30, 2001, $29.4 million of long-term debt was hedged with interest
rate swaps, effectively fixing the interest rate at 6.63% and 6.65%. This debt
bears interest at variable percentages above LIBOR, currently 2.0%, as
determined by the credit agreement.
Therefore, at September 30, 2001, the remaining $4.3 million of the Company's
long-term debt bears interest at variable rates. The Company's earnings and
after-tax cash flow are affected by changes in interest rates. Assuming the
current level of borrowings and assuming a hypothetical 200 basis point increase
in interest rates under the Company's long-term bank credit facility for one
year, the Company's annual interest expense would increase by approximately
$86,000 and net income would decrease by approximately $51,000.
In the event of an adverse change in interest rates, management would likely
take actions to further mitigate its exposure. However, due to the uncertainty
of the actions that would be taken and their possible effects, the analysis
assumes no such actions. Further, the analysis does not consider the effects of
the change in the level of overall economic activity that could exist in such an
environment.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently a party to any material litigation.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTI CONSULTING, INC.
Date: November 8, 2001 By /s/Theodore I. Pincus
---------------------------
THEODORE I. PINCUS
Executive Vice President, Chief Financial
Officer (principal financial and accounting
officer) and Secretary
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